unctad.org | World Economic Forum on East Asia: Countdown to Regional Integration
Statement by Mr. Supachai Panitchpakdi, Secretary-General of UNCTAD
World Economic Forum on East Asia: Countdown to Regional Integration
Ho Chi Minh City
06 Jun 2010

[AS PREPARED FOR DELIVERY]

Distinguished delegates,
Ladies and gentlemen,

Let me preface my statement by saying that regional cooperation will not, in itself, necessarily provide an exit strategy from the crisis or offer a panacea for economic development. The success of regional cooperation depends on the characteristics of the countries involved, in terms of their production and export structure, on geographic and political considerations, and not least on the will and ability of countries to cooperate. Regional cooperation is therefore highly contingent on several factors.

UNCTAD has long thought that well-designed regional integration agreements can be a useful stepping stone for development and for integration into the world economy. By creating larger markets, such agreements offer greater export opportunities for enterprises in all participating countries. They allow for the exploitation of economies of scale and can give a healthy dynamic impetus of competition to local enterprises. Larger markets will also be an important factor in attracting more FDI.

Three years ago, UNCTAD argued in our Trade and Development Report 2007 that regional cooperation and agreements between similar countries could provide significant development opportunities. Developing countries should not wait for the global North to decide what´s best for the international economy. The expansion of regional cooperation in many developing regions is recognition that multilateral approaches are not the only game in town. In particular, regional cooperation increasingly seeks to integrate countries in some form of financial cooperation. Countries in East Asia established the Chiang Mai Initiative after the Asian financial crisis in 1997/8 and have recently expanded its swap agreement facility. However, in order to tackle the reserve issue, regional mechanisms, such as Chiang Mai may need to grow even bigger. At the time of the Asian crisis, South Korea was rescued with what was then considered a very large bail out to the tune of US$ 10 billion. Needless to say, this now appears like small beer in comparison to the bailouts we have seen in the past two years and, of course, the US$ 1 trillion rescue package for Europe.

When it comes to securing gains from trade, UNCTAD has consistently argued that market and product diversification are essential for stable economic growth and that regional solutions can provide alternative sources of demand as well as allowing firms to build competitiveness. Increasing regional cooperation in the areas of trade, finance and also infrastructure, may help offset declining demand from advanced economies and provide greater protection from external financial shocks in the short to medium terms.

The Asian region has certainly not escaped the damaging impact of the crisis, with a number of leading economies registering stagnant or even negative growth over the year. However, in China, which during the recession overtook Germany to become the world´s biggest exporter of manufactured goods, growth has remained strong enough to shift the balance of global economic power further towards Asia. This year, growth in Asia is expected to reach more than 7%. Indeed, and unlike after the 1997 Asian financial crisis, when countries in this region pinned their hopes of recovery on Western consumers, the developed world is now looking to Asian governments and businesses to resuscitate global demand and provide a boost to trade.

An UNCTAD study on South-South trade suggests a positive effect from the various FTAs between ASEAN and other countries. This report shows that: (1) the creation of these RTAs would bring about upward effects on GDP in all signatory countries; (2) the reduction of non-tariff measures (NTMs) would have a greater impact on GDP than tariff elimination; and (3) larger economic effects are expected as the number of signatory countries increases. As ASEAN countries are expected to gain in any regional trade agreement they may conclude, third countries are likely to be affected negatively through trade diversion effects. This seems to explain the observed acceleration of bilateral agreements in the region: as China and ASEAN continue to develop their FTAs, Japan and Korea are compelled to expand/create FTAs with ASEAN in an attempt to reduce any possible trade diversion effect. Studies based on economic modeling have shown that the regional agreement (an East Asian FTA) would yield higher economic welfare gains and a greater economic impact to East and Southeast Asian economies as a whole, than any of the bilateral agreements. On economic grounds alone, the inclusion of more member countries would lead to a more desirable outcome.

Regional integration is not only about trade and finance. One of the most beneficial results of regional cooperation in the ASEAN region will be infrastructure development, and in particular for trade and transport. Mere reductions in tariffs through regional integration are not sufficient to enable trade. A number of complementary measures are needed to allow countries to take advantage of market access opportunities. These include efficient customs administrations, transport networks and compatible rules and regulations.

While all ASEAN countries, except for Laos, have access to the sea, further integration will depend on the development of inland road and rail access to link rural areas and increase overland connections to parts of China, which recently signed an agreement with ASEAN. The Chiang Mai road corridor is one such investment in this direction. A recent study has shown that while an additional 1,000 km by sea raises transportation costs by 4% on average, the same distance by land amounts to a 30% increase. Thus, improving transport and trade facilitation can have a dramatic impact on trade costs.

There are also gains to be had from coordination in the setting of safety, environmental and other standards and regulations. In this context, the negotiations on trade facilitation in the WTO would be of particular interest to ASEAN countries. In these negotiations, WTO members are aiming to improve the current Articles V, VIII and X of the GATT, which deal with transit issues, fees and formalities and the transparency of trade procedures.

The private sector must be closely involved in addressing these issues. After all, it is private enterprises that know best in which area they face the biggest obstacles to trade. Which roads or railway lines are in the most urgent need of repair? Which regulations are causing the greatest difficulties? Private-sector associations can make useful contributions to this. The private sector is also the principal beneficiary of any such measures. Private enterprises can thus bear a part of the costs of providing the public good of trade infrastructure. Including them in this way would also ensure that they are fully committed to the project in question.

At the regional level, I can´t emphasize enough the need for regional action. Having experienced at firsthand the Asian financial crisis of the late 1990s, I know that enthusiasm cannot be maintained very long at the global level. We saw this already with the food crisis, and now we are seeing it again with the financial crisis, that as soon as there are signs of returning normalcy, we go back to business as usual - and this is what happened after the Asian crisis. However, looking at other successful regional initiatives, such as the EU, it is clear that regional cooperation will not work unless there is a strong will and desire for countries to find regional solutions to such problems as transport and trade facilitation, labour mobility, trade policy and financial cooperation, as well as other issues I haven´t mentioned here, such as environmental and security concerns.

The experience of Europe offers a useful precedent for the ASEAN region. It is clear that one of the key challenges facing regional integration concerns uneven levels of economic development between countries and between regions within countries. The European project has taken more than 50 years to expand and strengthen, and it still faces major problems of economic unevenness between its core and periphery. Although it has been successful at redistributing funds to less developed regions, such as the experience with Spain in the 1980s, it cannot act as freely as the United States of America, for example, which has been even more successful at equalizing economic difference between regions. It requires a political will which is more problematic in a union of countries than in a federation of internal states, and this political will in Europe has recently been tested by the Greek debt crisis.

Not all European countries have pursued integration at the same rate: with a single currency, there are now two tracks whereby some countries have gone ahead with further integration and others, such as the UK, have preferred to wait and see; with labour mobility the UK has also preferred to stay outside of the Schengen Agreement on the movement of persons. Harmonization of laws and policies is an important area of integration, but countries can also proceed at the own pace. The point to remember is that the sequencing of integration should take account of different country needs and capacities - in the same way that sequencing is essential in multilateral harmonization efforts, where the differences between countries are even greater.

However, there are no right or wrong answers to the timing, scope and order of integration. While Europe offers some instructive examples, it is clear that the Chiang Mai Initiative and discussion of a larger Asian Monetary Fund are as advanced, if not more so, as discussions in Europe about a similar Fund and financial cooperation. The recent US$ 1 trillion fund created between the European Central Bank and the IMF is a step towards a European Monetary Fund.

The title to this session is "Countdown to Regional Integration": whilst, the ASEAN region has made rapid advances at integrating trade and is moving ahead with further efforts to cooperate on financial issues, there is still much to be done on the harmonization of rules and procedures in many areas from labour mobility to educational qualifications. Whilst we can benefit from other region´s experiences at integration, it may be that the Countdown could take longer than we imagine.



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